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Broadcom (AVGO) to Report Q1 Earnings: A Beat in the Cards?

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We expect Broadcom Limited (AVGO - Free Report) to beat expectations when it reports first-quarter fiscal 2017 results on Mar 1.
    
Why a Likely Positive Surprise?

Our proven model shows that Broadcom is likely to beat earnings because it has the right combination of two key ingredients.

Zacks ESP: Broadcom’s Earnings ESP is +0.66%. This is because the company’s Most Accurate estimate stands at $3.04 while the Zacks Consensus Estimate is pegged lower at $3.02. A favorable ESP serves as a meaningful and leading indicator of a likely positive surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Broadcom currently carries a Zacks Rank #3 (Hold).

Note that stocks with a Zacks Rank #1(Strong Buy), 2 (Buy) or 3 have a significantly higher chance of beating earnings estimates. Conversely, Sell-rated stocks (Zacks Rank #4 or 5) should never be considered going into an earnings announcement.

The combination of Broadcom’s +0.66% ESP and Zacks Rank #3 makes us reasonably optimistic of an earnings beat.
 

Broadcom Limited Price and EPS Surprise

 

Broadcom Limited Price and EPS Surprise | Broadcom Limited Quote

What is Driving the Better-than-Expected Earnings?

Broadcom’s extensive product portfolio serves multiple applications within four primary end markets – wired infrastructure, wireless communications, enterprise storage, and industrial & others. The company’s focus on multiple target markets and geographies mitigates operating risks and lessens exposure to volatility in any single market.

For first-quarter fiscal 2017, Broadcom forecasts non-GAAP revenues of almost $4.075 billion (+/- $75 million). Wired Infrastructure business revenues are anticipated to remain flat sequentially due to weakness in broadband carrier access and set-top box businesses, mitigated by continuing growth in fiber optics and strong demand from several cloud data center operators.

Wireless Communications revenues are expected to decline at least in the mid-teens percentage basis owing to seasonal decline in demand.

Broadcom anticipates strong storage end market to drive Enterprise Storage revenue growth to 20% on a sequential basis. Industrial revenue is expected to increase sequentially in the mid-single digits.

Notably, Broadcom has beaten earnings estimates in each of the last four quarters with an average positive earnings surprise of 6.36%. Moreover, the company’s return of 18.5% compared favourably with the Zacks Electronics-Semiconductors industry’s gain of 18% on a six-month basis.

 



We believe the momentum to persist backed by Broadcom’s strong product portfolio, impressive pipeline and continuing cost-synergy realization from the Avago merger. Moreover, the IT platform integration is expected to help lower operating expenses. Additionally, strong free cash flow generation capability aids the company to boost shareholder returns, which will further drive stock price.

However, regulatory headwind related to Broadcom-Brocade is a concern. We believe that the recently announced divestiture of Brocade's Ruckus Wireless and ICX Switch business to ARRIS International for $800 million in cash will not only reduce leverage but also smoothen up the path related to regulatory approval for the merger. Broadcom currently expects to close the Brocade acquisition in third-quarter fiscal 2017 ending Jul 30.

Other Stocks to Consider

Here are some companies you may consider as our proven model shows they too have the right combination of elements to post an earnings beat this quarter:

Pixelworks (PXLW - Free Report) has an Earnings ESP of +66.67%. It carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

MSCI Inc. (MSCI - Free Report) also carries Zacks Rank #2 and has an Earnings ESP of +1.18%.
 

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